What did the Fed do & what next?

Okay, very good morning, Thursday 20th of December. Hope everyone is good and well rested after a late one last night. Not in regards to, to being out all night, but in regards to the FOMC, of course, and quite a good move that we saw in response to what arguably is the final kind of big event of the year. And we were kind of saying this in the buildup, in the fact that even if it was in line, it was still going to be market moving, and that kind of proved to to be the case because we were anticipating a dovish hike. We got a dovish hike. The only thing is, as I was explaining last night ahead of the event, there's a real cross-section of what dovish really means between ultra dovish and just mildly dovish. And that whole idea about the market getting a little bit ahead of itself, overtly looking for kind of extreme dovish signals And in summary, got disappointed. The Fed did indeed change the trajectory of their, their kind of curve of interest rate hikes next year and in the future. However, not to the dramatic fashion as markets had priced. And then as we'll discuss, there's a few other things as well that meant that we saw quite, quite an extreme sell-off in the equity market. But we have had a bit of recovery this morning. And we're going to talk through first the initial reaction. So here it is, and this is the S&P 500 faced its worst reaction to a Fed rate rise since 1994. I did have a quick check on, on Donald's Twitter handle this morning, and I can't really see he said too much so far. So obviously this being absolutely detrimental to the kind of staple of what Trump likes to define as the success of his policies and, and the health of America defined by the stock market. Dangerous game. But I think Powell overall for sure has made the right decision here. And we were talking this time yesterday about keeping options on the table, taking an incremental approach to not be seen pandering to markets. And I think that's exactly what he's done, and I think that's the best course of action to follow. So I think looking at these types of one-off sell-offs, I don't know, I wouldn't read too much into this type of statistic. It's a nice sensationalist headline to run, but this is more of a byproduct of a market that was kind of mispriced, if you like. One man— let's get this man's Twitter following up. Um, Safe Ali, obviously a member of the Amplify team. 10 minutes before the interest rate decision, he put it out there: I expect them to hike and commit to 2 more hikes this year. Any less would be premature, whilst continuing the forecast of 3 hikes next year would terrify investors. Overall, I see the market being disappointed. And of course, Saif with this call was right on the money. So definitely one to follow if you don't already. A couple things then, and one thing I know those who, who did join us, uh, in trading live last night, um, this was a very kind of crude mock-up of what I had ahead of the event to help prepare our traders. Now if if you exclude the green and red and obviously the blue part at the bottom, essentially what I tend to do ahead of these big events is try to form a checklist in order, when there is a large amount of information coming out, you to specifically pinpoint the areas of interest which could then create market movement, and then the order of which the information is to come out. So we had kind of an 8-point checklist divided into 2 distinct sections: the 7 PM initial statement and the projection side, and then the press conference that followed. And so just looking at these and recap, I've kind of added a few comments here as what actually happened as to what areas we were looking at. And you can see why the market was disappointed here. The first and foremost was, were they going to hike? And, you know, we were saying that it's very much the case. That was how markets were priced. That was really of little surprise. However, one of the first parts here, point 2 and 3, was, well, what's the, what's the number of rate hikes to come next year in 2019? And the markets, if you remember, were kind of priced close to being one and done, i.e., none in 2019. And that was a real key area, I think, where the initial moves came from that created this kind of initial hawkish reaction, was because they decided to be incremental, as we said, and they moved from 3 to 2. Also, that really key phrase that we were looking for, you know, how do we determine whether the Federal Reserve is getting close to the, the neutral rate, i.e., a removal of further gradual increases means they're pretty much there already, and so no more rate hikes, or maybe just one thereafter. But the point is, did they drop that phrase? No, they kept that phrase. So even before, you know, getting your real teeth into the actual dot plot matrix and the table of their, their projections, you already had that quite clear sign. And then the other thing was, and this was a big thing which I, I am a little bit surprised on, was this monitoring of financial, economic, and political developments across the world. Because as we know, there are multiple at the moment, uh, he really said not very much at all. In fact, said risks are roughly balanced. So if you remember, part of the reason why the market, I think, got a little ahead of itself with this dovish expectation is really twofold. One, led by the Fed communication themselves. Remember, a couple of weeks ago, Jerome Powell kind of changed quite distinctly coarse and started sounding much more dovish amid the sell-off that we were seeing, the equity market correction during the kind of October-November period. The other thing though is the ECB came out last week, and remember what the ECB said— it's things are kind of broadly balanced, however there are some signs of potential downside risks. So the fact that other big central banks are kind of appreciating the fact that things need to be monitored now and they need to be vigilant for these external factors which are showing deterioration. I think that led to the markets thinking, well, the Fed got to follow suit. Now the equity market's under pressure, oil's been collapsing, and I just think then in the end what we've seen here is a Yellen-esque play they've hiked, they've sounded dovish, but just not quite to the tune of which the markets were potentially anticipating. Here's that dot plot, because I thought this might make things visually a little bit clearer. This is exactly what we're looking at, the green line being the connected dots of the median forecasts of the, the Fed members. So as you can see here, uh, the red curve has got distinctly more shallow So a couple of questions I've had this morning is, um, well, T-notes, uh, if they're, if they're hiking rates, why are T-notes up? Why is gold rallying this morning? And, and these different kinds of things. Well, let's just, let's not forget here that ultimately interest rate, the, the rate of rate rises, or the pace of rate rises, and the height now of the new neutral rate is lower. So this is dovish. Although we were disappointed last night, let's not detract from the fact that yes, it's still above that of market expectations sharply, but they have become a little bit more cautious. We are getting close to that kind of upper level, and we have pulled back from where we were from, from the last projections in September. The other thing is, if, well, if the equity market's going to sell off considerably like it did, you know, it does start to create the, the message that, well, the Fed does have the option to change tact. One of the important things to always remember about 2019 is that— and this is a point I was kind of making yesterday— is that forget the historical precedence of the Fed really only making meaningful policy change in the quarterly ones when they have the projections in the press conferences. Because now you don't need to really wait till March, June, Sept, Dec, because as of January and every meeting thereafter now going forward in 2019 and beyond, there's a press conference like with the ECB with every Federal Reserve meeting. And for me, that means then that Jerome Powell and his colleagues have a little bit more flexibility because now they can re-communicate strategy without having to wait really for a big 3-month window. And so, yeah, hence the reason why I think he was right to stick by his guns. And as you can see from the charts this morning, the market has relatively calmed down. I mean, check out the dollar index this morning. To the tick, it's completely reversed the move. And I'd kind of expect that to be the case. I mean, this is again more of a function, I think, of the markets mispricing ahead of the event. Rather than it is in a real game-changing thing from, from the, from the Federal Reserve. I think this is what they were always going to do. Looking at the EURUSD pair then, you know, and cable, you've got basically a perfect U-shape back to where we were, to the pre-announced levels. Gold's recovered. The only thing that's remaining a little heavy here is the equity markets. And, you know, going across these major 3 indices You can see here the technical breach that we had. This was the initial move on the statement, then the press conference came. And let me just show you how the S&P reacted in a bit more detail. Here it is, there's the statement, but then in the press conference you might have thought, well, Jerome Powell's probably got his earpiece in and they're informing him that the stock market is dropping rapidly. And is he going to come out to sound a little bit more dovish just to temper any of those kind of hawkish moves that we had seen? And in fact, he just kind of towed the line. He said the balance sheet runoff is smooth and it's on autopilot. Quite a key comment that's being isolated by Bloomberg, that being the fact that this quantitative tightening, which is another form of the kind of unconventional policy tightening away from just interest rate hikes, not going to change that, going to keep going, it's on autopilot, no need to stress at this point. And so obviously equity didn't like that as well. It's just another element that kind of disappointed the doves and down we went. Not forgetting though, this is, this can be, and if you, if you were part of the event last night, you could see how rapidly and kind of staggered movements the US equity market was selling off and This is when you get the kind of perfect storm with a fundamental catalyst. You can see here you get a clean technical break, and the setup was pretty much identical across the Dow and the NASDAQ futures. And then it— the whole thing starts to capitulate very quickly, because if you start looking at the S&P 500, what was really important here was, you know, pre the event, we were sitting above that really clear support point, which was the February low around 2529 in the futures. And soon as we broke that, and then the subsequent levels in the other indices were broken, you know, you get that momentum selling, the algos also pushing the move, and it's almost self-fulfilling. Then you get this, this quite dramatic run lower. Um, importantly then, we did close below that level, and we remain, uh, sub the 2500 psychological point at the moment. So you gonna be definitely interested to hear now what Trump has to say, not just about the Fed. I think that's gonna be pretty much scripted. He's not gonna be happy. But more interesting is gonna be, does he kind of massage the China trade rhetoric just to kind of alleviate some tensions, just to see out the end of the year? Would be quite interesting. So Yeah, the equity markets weakness probably just helps fuel the move in the US Treasury market. Just given the depth and the speed of the sell-off last night, it kind of immediately started to fashion a rally in the fixed income futures space. If you think about it, you've kind of got— it's the opposite of Goldilocks in a sense. And by that, what I mean is now you've got tightening policy, which the market feels potentially is too much, and you've got a weakening economy. So ultimately then, most people will believe this could well be the balance that tips us in quicker to what the inversion has suggested, that the recession could be coming. Have the Fed been too strict here in not responding to outside economic developments? And so with the equity sell-off, I think that was just a classic kind of move into into Treasuries there. With the, the dollar move, I think that's why gold suffered so badly initially, but now that the dollar's recovered and come back to square one, hence gold's continued to edge back up higher again. And I think gold at this point, now we've kind of shook out the FOMC move, reverts back to the kind of typical safety asset. And so if equities were to sell off again into the Christmas period, I'd be still looking for that to play out the same thing, i.e., gold to move higher. Okay, so that was— that's hopefully the wrap of, of what exactly happened last night. Obviously, any more questions that people have, just let me know after, after the brief. A few other things I just wanted to cover on the news space. Um, not that this is moving markets, but I do think that You know, once the first domino falls, it does act as a bit of a trigger. And just given Amber Rudd, the Work and Pensions Secretary, is, you know, is on this, on the cabinet, and so one of the senior people within this whole Brexit debate alongside Theresa May in the government. Last night she had an interview with Robert Peston of ITV, and and she basically said she could see a route to a second referendum on Brexit. Now the reason why that is quite significant is because she is the first member of the cabinet to say so. If you remember, Theresa May has been absolutely resolute at this point of ruling out a second referendum, saying it would destroy public trust in politicians who have a duty to implement the results of the first vote. But Amber Rudd last night said, while stressing it's not something she's seeking, that if Parliament is unable to agree on a Brexit package, it may be the way to break the deadlock. For me, this goes back to classic strategy of managing the situation. You have two people, of which are senior to this on the Conservative side, your leader absolutely continues to play the line of this idea of she has to appease the Brexiteers now, and she also has to get onside the democratic vote and so deliver the will of the people. However, you also drop in, kind of through the back door, this optionality that could be a second referendum as well. So it's kind of, keeping all options on the table while keeping the same official line. I think this is just quite inevitable really. The one thing is, is that remember today is parliamentary recess, they don't come back until the 7th of Jan, and so you're going to get a lot of Brexit headlines obviously over the Christmas period. I'm really interested to see whether I can make it through Christmas lunch without the B-word, the dreaded B-word being mentioned. You can imagine me doing the job that I do, I get asked all the time. Christmas is a really bad time for me because people ask me, "Ant, what do you think about house prices?" "Ant, what do you think about Brexit?" "Ant, what do you think about the pound?" And I go, "All I want to do is eat pigs in blanket, have a drink, and watch the football," if I'm quite honest. Um, but hey, there you go. Um, anyhow, let's move on. Bank of Japan last night. There is actually two other big central bank decisions that have come out. One is the Bank of Japan overnight, but the point being is although these are influential central banks for sure, the actual announcements themselves are largely non-events. Way too much other focal points in the market that are driving intraday sentiment at the moment. So to quickly sum— surmise, the Bank of Japan left its stimulus settings unchanged. Final policy meeting of the year, um, no, nothing was changed. BOJ kept its yield curve control program, its asset purchases unchanged, all completely as expected. The other thing that we've got to look out for today as well, of course, is we do have the Bank of England. The one thing is here, I'm not even going to go into detail at all with the Bank of England because it's a bit of a non-event, just given the obvious factors of the, the big political cloud of uncertainty hanging over the economy. That just means that absolutely I'm expecting a 9-nil vote The minutes that come alongside this could be quite interesting just to hear the kind of interpretation of current economic conditions. So just like we were looking out for, for the Fed, how much does Mark Carney and his fellow MPC members pay notes to what has been a deterioration in the global economic environment, and subsequently what does that mean for, for them? I would say Trying to read too much into the Bank of England's forward-looking kind of outlook is, is not really that prudent because ultimately Q1 holds so much importance then for the potential firm recovery of the UK economy under what would then potentially be a move into the transition if the deal does move on, or the complete opposite if we had a no deal come March 29th. Then, you know, it would not be surprising at all to then see, well, this 0.75% go all the way back down to zero and the QE machines come back on again. So trying to forecast what's going to happen in the future too far ahead of time, I think it's, it's not even worth entertaining. To give you a bit of a flavor of what I'm talking about, I saw this chart this morning, which is a couple of the big banks and their sterling dollar, so cable forecasts. You got Nomura looking for 160. That's some serious, serious movement. I think the reason why they came out with that, they were saying that in large part of our upbeat sterling forecast is that they're very bearish on the dollar, and their base case is that the UK will avoid a hard Brexit and either a deal is agreed before the deadline or a second referendum takes place. So that's the reason for the bullish outlook for Nomura. The most extreme opposite, if you were talking about a no deal, HSBC are off the chart here. They're down at 110 if there's a no deal. So if you've got HSBC no deal 110, Nomura safe passage, and also accompanied by dollar weakness, up at 160. And then everything else in between. So, you know, it's a, it's a bit of a potluck really, trying to make those kind of calls where there's so much, um, still to come over the next couple of weeks. Um, going back, final piece of news I think you just need to be aware of. There's obviously quite a few people that have talked about the potential for a government shutdown. As I've been saying throughout the week, these appropriation bills, already about 75% of them had already been passed, so didn't really see this as too much of a threat. And last night, the Senate took the first step to avert the partial shutdown by passing a temporary spending bill that puts off confrontation over Trump's proposed border wall until February. For any of those who have been in the market long enough, this is why the market tends to be fairly passive in reaction to this kind of idea of a government shutdown, because ultimately all they do is kick the can down the road and everyone kind of forgets about it for another few months, and then we do the whole thing again and so on and so forth. So seemingly this is passed as a, as a slight threat to markets, um, going forward. Finally, I just want to have a quick look at oil and then we'll have a quick recap of the calendar because WTI crude just having a little move to the downside. I guess this becomes fairly interesting again for, for crude. You can see here we're just getting close to retesting some of the lower bound of, uh, this week's price action. You got kind of got two real areas here And so really this band, because you can throw in where the, where the, the support line is, is right over the S1 level. So really you've got this band here that's going to be quite important for price activity going forward through the rest of the session. So just marked it up there. If we can get through there, then obviously just looking back at these charts, put it on a daily, it starts to get, starts to get interesting again very quickly. Because if we get through that point— so just going back to the charts here, the 4— you got the 46 handle just above 11, then was the weekly low just above there, the S1, uh, and the previous day's low points. So some key support areas here for crude. If equities were to sell off again, if the market, when the US come in, continues to believe that it's an incorrect decision from the Fed to remain kind of soft hawkish rather than reacting more to economic conditions beyond that of just the economic activity in the US. If equities come down, I'll be expecting oil to come down. You get that flight to quality move— T-notes, gold bid, and so on. Okay, quick look at the calendar for today. A couple of UK data points actually coming out in a short while. So 9:30, we get UK retail sales. I think I saw Sam North tweeting about this, our correspondent hitting Oxford High Street last night, and he was saying that things remain pretty quiet. And I think I'm right in saying he's got a mate of his who owns a big pub, and he was saying how it's been incredibly quiet over the Christmas period. You know, that's a two-man sample, not saying that that's indicative of everything. But obviously with consumer confidence still multi-year lows, household income still very much under pressure. Christmas is one of those times of years where that's kind of almost exacerbated because of the need to spend and purchase goods for your loved ones. Then, you know, these high street numbers, a retailer, Christmas is pivotal. But I'm sure, you know, typical man fashion, I'm going to buy all my Christmas presents on Christmas Eve, and I'm pretty much banking— I'm hoping the economics plays out and my forecasts are right— that there's going to be slash discounting on Christmas Eve because the retailers will be desperate. Let's see how that plays out. People either get good or bad presents. We'll find out on Christmas Day. Otherwise, beyond that of UK retail sales, you've got weekly jobless claims coming this afternoon. I wouldn't be looking for that to be too much of a spark of activity. The Philly Fed Business Index could be quite interesting just given the context. You remember we had Empire Manufacturing, which was a real catalyst actually earlier in the week for renewed negativity in the market because it was such a dramatic drop. Whether we, we get that in the Philly Fed Business Index will be quite interesting as well. What would be the worst-case scenario for Powell is significant worsening in the economic data points, which would prove that potentially he's made the wrong call here. Otherwise, going into the speaker section— not otherwise, I got too much going on, to be, to be quite frank. So waiting for the US to come in, I think that's going to be probably the most astute play because much of the market move I think has already been done this morning, which is the reversal of the dollar strength. And so now it's about just waiting for the Americans to come in with particular interest about how these equity market and oil price perform. Just as I'm speaking, I can see oil still remaining under pressure here. So just coming down to the lower bound now of that, in that, right in that zone that we had highlighted. Okay, that's it. Any questions, do let me know. I'm going to get Sam to jump on Anthony Cheung in a second, and he can talk through any technical setups that he's seen of interest this morning, and I'll get him to share them in the chat room. Otherwise, have a good day.